BILLS OF LADING AND LETTERS OF INDEMINTY: COMMON PROBLEMS AND BEST PRACTICE FOR MASTERS

Published: 25 November 2024

The bill of lading (B/L) plays a vital part in shipping goods by sea and serves the following functions:

A document of title, providing evidence of ownership of the goods described in the B/L.
A receipt for goods received by the carrier.
Evidence of the contract of carriage between shipper and carrier.

The correct completion and handling of the B/L is imperative to reduce the carrier’s risk of liability for cargo related claims.

COMMON ISSUES

‘CLEAN’ BILLS OF LADING

A master may be requested to sign only ‘clean’ B/L, usually because this is required by a bank in order to extend credit to the buyers of the cargo. Difficulties arise when the goods supplied for carriage are not in the condition described in the B/L. The master should only sign B/Ls that contain an accurate description of the goods and their condition. Issuing an inaccurate B/L may amount to a misrepresentation, possibly rendering the carrier liable for cargo related claims and may prejudice the carriers’ P&I cover. Carriers may consider accepting a letter of indemnity (LOI) from the shipper or charterer in exchange for their agreement to issue a B/L which does not describe the cargo and/or its condition accurately. The LOI may provide the carriers with some protection as a substitute for the potential loss of P&I cover, but it will not remove their exposure to any resulting cargo claim. There are also many associated risks in accepting an LOI which we set out below.

Occasionally owners and charterers agree to a charterparty clause which states that the master must sign clean B/Ls, irrespective of the actual condition of the cargo. Owners would likely be in breach of the charter terms if the master then refuses to sign clean B/Ls. However, the parties should bear in mind that, even if a charter party clause allows clean B/Ls to be issued in all circumstances, there is a significant risk that P&I cover will be prejudiced in the event of a claim arising due to the cargo being wrongly described.

Any clauses relating to the condition of the goods should be inserted in the B/L before signature, otherwise goods that match the description should be supplied.

If Members have any concerns about the description of the cargo included in the B/L, they should contact the Club for assistance.

QUANTITY OF THE GOODS

A situation may arise where the quantity of goods supplied does not match that declared on the B/L. Many B/L forms include the words ‘weight, measure, quantity, quality, conditions, contents & value unknown’, or similar. While this indicates that the figures supplied are provided by the shipper and not the carrier, it should only be relied on if determining the quantity accurately is not feasible. For example, a cargo of 100 packages can easily be confirmed, whereas 30,000 metric tonnes of bulk cargo is difficult to determine accurately. Even then, in many jurisdictions the incorporation of such wording in the B/L may be of limited use in defending a cargo shortage claim.

If the master believes that the figures supplied by the shippers do not match the ship’s own calculations or tally, then the ship’s figure should be entered on the B/L. In some circumstances, the shippers may reject a B/L showing the ship’s figures and insist that their own figures are used. This regularly results in a dispute with pressure being put on the master and owners to sign the B/L as requested by the shippers/charterers.

The legal position is that the ship’s figures should always be inserted in the B/L. We have seen owners agreeing with the shippers/charterers for commercial reasons that both the ship’s and the shippers’ figures will be inserted on the face of the B/L which offers some (but not complete) protection to owners in the event of a shortage claim. However, regularly, shippers do not agree to this, and it is then a commercial decision for owners to make as to whether they comply with the request to insert the shippers’ figures on the B/L in exchange for an LOI from the shippers/charterers. This may potentially prejudice owners’ P&I cover, and owners would have to rely on the terms of the LOI in the event of a claim arising.

Depending on the type of cargo and load port (or place) conditions, it is sometimes difficult to measure, with accuracy, the quantity of cargo loaded on the ship. This argument is regularly run by shippers/charters to try to persuade owners to sign B/Ls with the shippers’ figures, rather than the ship’s figures, on the grounds that the ship’s figures are not sufficiently accurate due to sea/swell/weather conditions. If Members have any concerns about the figures for the quantity of cargo that shippers/charterers wish to insert in the B/L, they should seek assistance from the Club.

CHECK POINTS

There are other points that should be considered when issuing B/Ls:

Check that the B/L incorporates the Hague or Hague-Visby rules, often in the form of a clause paramount.
Do not sign a B/L that is blank or only partially completed.
Confirm the correct port and date of loading is shown.
Any carriage instructions inserted in the B/L should be checked for consistency against other documents (mate’s receipts, voyage instructions, shipping order). If in doubt, the master should clarify them with the shipper and the shipowner.
Check the B/L is on the form stipulated by the charterparty or the ordinary form for the trade
Check that the terms of the applicable charter party are incorporated in the B/L and the charterparty incorporation clause is completed as applicable.
Avoid general wording (e.g. “other conditions as per CP” or “CP terms and conditions incorporated therein”). To ensure proper incorporation, wording should be included such as “all terms, clauses, conditions and warranties including the arbitration, choice of law, time bar and time limitation clauses of the charterparty dated [ ] are hereby incorporated in this B/L”.
Do not amend B/Ls after they have been issued.
Do not re-issue a set of B/Ls if an earlier set is already issued. Only do this after ensuring that the complete original set of B/Ls has been cancelled or destroyed.
Confirm the stated number of original B/Ls matches the number of bills presented for signature.
Sign only in the designated signature space or, if none, at the bottom of the B/L face and NOT elsewhere (signing next to the shipper’s description may be interpreted as confirming the description).
Retain a copy of the signed B/L marked/stamped “non negotiable copy” for comparison with the original B/L presented for delivery.
Do not accept deck cargo, unless the B/L is clearly marked as ‘CARRIED ON DECK AT SHIPPERS’ RISK’ or similar.
Do not discharge goods without presentation of an original B/L. If owners are prepared to agree to a request to discharge cargo without production of the original B/L, careful consideration could be given to doing so in exchange for an LOI from the charterer on the IG’s standard LOI wording recommended for this purpose. It is important to note that P&I cover may be prejudiced if cargo is discharged in this way even if an LOI is issued and accepted by the parties.
Seek clarification when instructed to discharge at a different port from that printed on the B/L. Again, if owners are prepared to agree to a request to discharge the cargo at a port not stated in the B/L, then careful consideration may be given to doing so in exchange for an LOI from the charterer on the IG’s standard LOI wording recommended for this purpose. It is important to note that P&I cover may be prejudiced if cargo is discharged at a place not stated in the B/L. In that case, owners would be forced to rely on the terms of the LOI in the event of a mis-delivery claim.

GENERAL WARNINGS AGAINST THE ACCEPTANCE OF A LETTER OF INDEMINTY

The Club generally cautions owners against the dangers/disadvantages of complying with a charterers’ request in exchange for an LOI. The following points should be carefully noted:

The issuing of a clean B/L when cargo is known to be mis-described is fraudulent and the acceptance of an LOI does not remedy the position.
The issuing of a clean B/L when cargo is known to be mis-described may prejudice P&I cover.
Courts in some jurisdictions consider LOIs that are given for the issue of clean B/Ls to form part of a fraudulent transaction and therefore may hold that the LOI is unenforceable, of no legal effect and void on the grounds of public policy. In these circumstances, owners would be left without P&I cover and having to rely solely on the terms of the LOI in order to make a recovery for any loss/expenses/damages suffered.
Owners should also bear in mind that an LOI is only as financially viable as the party who issues/gives the LOI. Owners should ensure that the party who issues the LOI is financially secure (or obtain a suitable bank guarantee as security) otherwise they might find themselves unable to enforce any claim under the LOI (assuming, of course, that the terms are enforceable given our comments above).

If Members find themselves in a position where they are being pressured to accept an LOI in exchange for complying with Charterers’/another parties’ request, they should immediately contact the Club for assistance.

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